With Covid-19, climate change, negative interest rates, prospects for rate hikes, inflationary pressure, and the continuing rise of digital technology, the main investment themes that are emerging in 2022 are environmental, social, and governance (ESG), healthcare, and the Metaverse.
First, ESG investing is expected to become mainstream this year as institutional investors, capital markets, and asset managers embraced green financing and sustainability-linked financing in 2021.
“With growing awareness, investors are increasingly looking at investments that align with their core objectives. As a result, funds employing ESG metrics continue to witness record-breaking inflows,” says Rahul Sen Sharma, managing partner of Indxx.
About US$649 billion was invested in ESG-focused funds globally through to the end of November, already up from the US$542 billion in 2020 and US$285 billion in 2019. ESG funds currently make up 10% of all global funds. For example, the Kim Kindex US Green Theme Indxx ETF, which tracks the Indxx US Green Infrastructure Index, has gathered over US$50 million in assets within four months of its listing in South Korea.
Portfolio anchor
Second, prospects for the healthcare sector continues to be boosted by the pandemic that shows no signs of abating. The sector, which now accounts for 11% of the global benchmark, demonstrates stable and secular growth characteristics and should serve investors well in this environment.
“The sector has delivered solid earnings and share price performance since the start of the decade and exhibited defensive qualities as shown in a lower level of volatility at the same time,” says Hou Wey Fook, chief investment officer of DBS Bank, in the bank’s 1Q22 CIO Insights report. “Covid has certainly shone a spotlight on the healthcare sector. Thanks to the gargantuan efforts of pharmaceutical companies, governments, and benefactors worldwide, vaccines were successfully developed at an unprecedented pace.”
In 2019, total healthcare expenditure amounted to US$3.8 trillion in the United States and US$27 billion in China, according to the DBS report.
Besides the growth trajectory, the diversity and size of the healthcare sector makes it an anchor representation in any portfolio construct. It comprises the following sub-sectors: pharmaceutical, equipment, biotechnology, managed healthcare, life sciences tools, services, facility management, and supply provisions, says Fook.
Unlike cyclical industries, healthcare demonstrates a consistent trajectory of revenue and earnings uptrend over economic cycles due to structural tailwinds.
These include ageing populations and longer lifespans, which drive demand for medical products and services; rising disposable income and greater medical expenditure; and continuous R&D activity, which leads to medical and technological advances that expand the total addressable market for new and existing diseases.
“Within the healthcare sector, we recommend investing in the bigger pharmaceuticals companies as they have the financial strength to conduct the R&D and expertise to ensure patent protection, have the resources to acquire prominent industry peers to ensure a continuous pipeline, are subsidised by governments to do exclusive orphan drug research which can add to profits, and are trading at attractive valuations,” Fook says.
'Parallel universe'
Third, the popularity of the Metaverse, essentially a virtual-reality technology ecosystem that allows users to interact in a computer-generated environment, has exploded since Facebook announced in June 2021 that it would transform itself into the Metaverse. The social media giant has rebranded itself as Meta and unveiled plans to invest US$10 billion into the ambitious undertaking.
Experts consider the Metaverse as a multitrillion-dollar investment opportunity with its current market size estimated at US$800 billion.
“Several other companies are working on the Metaverse, including Microsoft, Unity, to name a few,” Sharma says. “This theme is set for accelerated growth in 2022. Our Indxx Global Metaverse Index is intended to delineate the performance of exchange-listed companies that are involved in developing the virtual-reality space corroborated by the likes of artificial intelligence and 3D technologies where users can interconnect with computer-simulated environments.”
The Indxx Global Metaverse Index has been licensed by a leading asset manager in South Korea as an underlying benchmark to the Mirae Asset Tiger Global Metaverse Active ETF Fund, which witnessed record-breaking turnover of US$91 million on its listing day.
DBS mirrors this view, saying “the rise of the Metaverse as our ‘parallel universe’ has come to the fore as Big Tech rapidly jumps onto the bandwagon. In an environment where our real and digital lives meet, the rise of the Metaverse will revolutionize the way we live, work, and play. Advertising, retailing, and remote work will never be the same again.”
Fook adds: “We have previously introduced the I.D.E.A. (Innovators, Disruptors, Enablers, and Adapters) framework for picking winners that can successfully navigate global digital disruption. I.D.E.A. companies such as Big Tech, game engines, and semiconductor companies are geared beneficiaries when the mass migration to the Metaverse takes place. Ride on this transformational shift and seize the investment opportunities that arise.”
